Impact of Carbon Price Policies on U.S. Industry

Abstract

This paper informs the discussion of carbon price policies by examining the potential for adverse impacts on domestic industries, with a focus on detailed sector-level analysis. The assumed policyscenario involves a unilateral economy-wide $10/ton CO2 charge without accompanying border tax adjustments or other complementary policies. Four modeling approaches are developed as a proxy for thedifferent time horizons over which firms can pass through added costs, change input mix, adopt new technologies, and reallocate capital. Overall, we find that a readily identifiable set of industries experience particularly adverse impacts as measured by reduced output and that the relative burdens on different industries are remarkably consistent across the four time horizons. Output rebounds considerably over longer time horizons, and the adverse impacts on profits diminish even more rapidly in most cases. Overthe short term employment losses mirror output declines, while gains in other industries fully offset the losses over the longer horizons. At the same time, leakage abroad is considerable in some sectors, particularly when reductions in exports are considered.

In a broad survey of American industries, researchers at RFF have estimated the impacts on costs and jobs of a climate policy that imposed a price on carbon emissions.
Within manufacturing, the hardest-hit industries would be oil refining, chemicals and plastics, primary metals, and non-metallic minerals. Although the short-run output reductions would be relatively large in these industries, they shrink over time as firms adjust inputs and adopt new technologies, and profits subsequently rebound, according to the researchers.

The work, carried out by Mun S. Ho, Richard Morgenstern, and Jhih-Shyang Shih, provides detailed estimates for more than 50 industrial categories.

Specifically, a price of $10 per ton of carbon dioxide would increase costs no more than two percent for most American industries, but there would be several exceptions. Costs would rise more than four percent for petroleum, chemical manufacturing, and cement, and between two and four percent for iron and steel mills, aluminum, and lime products. Sales of fossil fuels would decline over time, and agriculture would face modest but persistent declines in output. The service sector would be largely unaffected.

Job losses, in the short term, would be proportional to declines in output. But with time, the analysis showed, those losses would be offset by gains elsewhere in the economy.

Distinguishing between the immediate impacts of a carbon policy and its long-term effect is extremely important, the researchers emphasized. Policy that ignores the first impacts will raise concerns about fairness and invite opposition, they warned, while plans suitable for the short term may not serve the economy well as time passes.

They also addressed the issue of leakage—the extent to which the decline in carbon emissions in this country would be replaced elsewhere in the world by industries migrating to places with little or no controls on emissions. The researchers found that about one-fourth of domestic reductions would be replaced by rises abroad.

The Harvard Project on Climate Agreements hosted a research workshop in Cambridge, Massachusetts, on July 14–15, 2016, the purpose of which was to identify options for elaborating and implementing the Paris Climate Agreement, and to identify policies and institutions that might complement or supplement the United Nations Framework Convention on Climate Change (UNFCCC) process.